Investment Shastra

Do you know the ABC of Mutual Funds Investing…

…the Terms every MF Investor should understand?

Buying a Mutual Funds (MF) has become very easy, however, investing in them is not that easy. Investors wanting to understand what they are buying into, what can they expect from an MF may be a daunting task. E.g. even if you do finalize on a particular scheme, you will have to choose a Regular plan or a Direct plan, Growth option or Dividend option, Dividend reinvestment or Pay-out.

To top that, the MF industry uses its own jargon. It’s important for you to understand the MF terminologies used to be able to select and review your investments.

So, here is a rundown on the important terminologies you need to know before investing in a Mutual Fund:

Assets Under Management (AUM):

The money collected by an MF Scheme is invested across asset classes like stocks, debt Funds, gold, and cash. The market value of these investments at any given time minus the MF’s liabilities is known as the Fund’s AUM. (E.g. If a Fund’s value of investments is Rs. 100 Cr and liabilities Rs 5 Cr., then AUM is Rs. 95 Cr.) Though a large AUM denotes a Fund’s popularity and success, it also means restrictions on investing (Fund will have to invest mainly in large companies) and difficulty in replicating past high return performance.

Asset Management Company (AMC):

It is the Fund House or the company responsible for managing investors’ money, and in turn, all the MF schemes.

Benchmark Index:

A Benchmark is a popular index like the SENSEX, NIFTY or BSE 100, against which a Fund’s performance is gauged. A Fund is supposed to choose a Benchmark based upon the market-section it invests in. E.g. a Mid-Cap Fund may use NSE Midcap Index as its Benchmark. It makes sense to invest in an MF, only if it has consistently beaten its Benchmark performance over a 3-5 year period.


Every MF scheme collects money from investors, and this total money invested in the scheme is known as its Corpus. E.g. at the launch a particular scheme manages to collect Rs. 100 Cr from investors. By the end of one month, another Rs. 5 Cr invested by other investors. At the end of one month, the scheme’s corpus will be Rs. 105 Cr.

Direct Plan:

A Direct Plan means you investing directly thru’ an AMC/MF website. As there is no Distributor involved, returns generated by this plan will be higher by the percentage fees paid to a Distributor. We, at MoneyWorks4me, encourage investors to invest in Direct Plans.

Dividend Scheme:

Choosing this option lets you receive Dividends (in the form of extra units) when an MF declares it. However, remember that this isn’t extra income, and it will decrease a scheme’s NAV by its dividend amount. Choose this option, only if you want to have a regular income from your investment.

Dividend Payout:

Under this option, you will receive the declared dividend amount by cheque or direct credit to your bank account.

Dividend Re-investment:

Under this option, the declared Dividend amount will not be paid out to you. Instead, the Fund will use the amount to purchase new units for you at the prevailing NAV.

Expense Ratio:

The Expense Ratio is the fee charged by a Mutual Fund for managing its investors’ money. It is shown as a percentage of the Assets Under Management (AUM). E.g. if you invest Rs. 10,000 in a Fund with an Expense Ratio of 1.5%, then you are paying the Fund Rs. 150 to manage your money.

As a general rule, you are told to avoid Funds with a high Expense Ratio. However, it can also turn to be a good investment, if it consistently generates excess returns (Alpha) over its Expense Ratio.

Fund Manager:

S/he is a professional investor hired by an AMC to manage its MF investments. S/he will be the most important person in generating returns on your investment. Hence, it is important to know a Fund Manager’s investment process and philosophy before investing.

Growth Scheme:

Choosing a growth option means you will not receive extra units for the Dividend declared by the Fund. Instead, the amount will stay invested in the Fund, thereby compounding your returns. Choose this option, if you prefer capital appreciation over regular income from your investment.

Hybrid Fund:

A Mutual Fund that invests in a mix of Equity and Fixed-income Securities, which can change proportionally over time or remain fixed

Index Fund:

A Mutual Fund designed to track the performance of a Market Index. The Fund’s portfolio of assets is either a replicate or a representative sample of the designated Market Index. Often referred to as passively managed portfolios.

Junk Bond:

These are generally issued by corporations of questionable financial strength or without proven track records. They tend to be more volatile and higher-yielding than Bonds with superior quality ratings. “Junk Bond Funds” emphasize diversified investments in these low-rated, high-yielding Debt issues.

Keogh Plan:

It is a Tax-deferred Pension Plan available to self-employed individuals or unincorporated businesses for retirement purposes.

A Keogh plan can be set up as either a defined-benefit or defined-contribution plan, although most plans are defined as contributions.

Contributions are generally tax-deductible up to a certain percentage of annual income with applicable absolute limits in U.S. dollar terms, which the Internal Revenue Service can change from the year.


It is the expense that an MF incurs to manage investments. The Fund Manager fee is the highest cost involved in an MF operation. Other operating expenses include sales/agent commissions and ongoing service fees, legal and audit fees, registrar and transfer agent fees, Fund administration expenses, and marketing and selling expenses.

Load or No-Load Fund:

The load is the fees charged for buying (i.e. Entry load) and selling (i.e. Exit load) MF units. SEBI has scrapped the Entry load w.e.f. August 1, 2009. Some Funds may charge Investors an Exit load only on early exit (e.g. Within a year of investment) to encourage long-term investment behavior.

Money Market Fund:

A Mutual Fund that invests only in money markets such as commercial papers, commercial bills, and treasury bills certificate of deposit and other instruments specified by RBI. These funds have a minimum lock-in period of 15 days. Till recently, the RBI regulated Money Market Funds, but they now come under SEBI.

Net Asset Value (NAV):

It is the price per unit of the MF scheme. On any given day, NAV is the price at which an investor invests in an MF scheme. NAV = [the market value of all the securities held by the scheme minus its liabilities] ÷ the number of units. Since, the market value of securities changes every day, the NAV of a scheme also changes every day. Similar to a stock price, a high or low NAV does not affect our investment decision.

Open-ended Scheme:

An Open-ended Fund or Scheme is one that is available for subscription and re-purchase on a continuous basis. These schemes do not have a fixed maturity period. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices which are declared on a daily basis. The key feature of open-end schemes is liquidity.


The scheme’s investments across different asset classes (stock, debt funds, cash, and gold) are together termed as the scheme portfolio. The quality of a portfolio is an important determinant when deciding to invest in a particular Mutual Fund.


It is the information on the last trade, and current bid and asked prices.

Regular Plan:

Regular Plan is when you invest in an MF scheme through a Distributor or Broker. This means you will end up paying some fees to the Distributor. The fees are directly paid by the AMC to a Distributor. For you as an investor, it is reflected in the lower NAV values and higher Expense Ratio than a Direct Plan.


  • Alpha: It is the excess return generated by a Fund over its Benchmark. A good MF will manage to beat its Benchmark consistently over a 3-5 year period.
  • Fund Returns: The profit generated by a Fund on its investments.
  • Point-to-point (CAGR) Returns/Alpha: You may have come across 1Y, 3Y, 5Y, and 7Y returns on popular MF sites. This is the return between two pre-determined dates. e.g. Returns from 1-Jan-2016 to 1-Jan-2018. The period can be any number of years, months or days. Based on whether the end-point is high or low, such returns can give a false impression of the Fund’s performance.
  • Rolling Return/Alpha: Rolling Returns consider performance on every day or week (or any specified frequency) of a defined period, and hence, tell you how you would have fared regardless of when you chose to invest. E.g. A monthly five-year Rolling Return returns from 1-Jan-2013 to 1-Jan-2018, 1-Feb-2013 to 1Feb-2018, subsequently for all months. For 3-yr or 2-yr rolling, the year changes respectively. We advise our users to look at Rolling Alpha because it allows you to evaluate the consistency of a Fund’s performance over time—including the ups and downs of market cycles.

Systematic Investment Plan (SIP):

SIP refers to periodic investment in an MF. In this option, you commit to investing a pre-decided amount, at regular intervals, and you get allotted Units based on an MF’s NAV. E.g. Suppose you do a SIP of Rs. 1,000. If, for the 1st month its NAV is Rs. 15, you get 66.67 units. For the 2nd, the NAV is Rs. 25, so you get 40 units. For the 3rd, the NAV is Rs. 20, you get 50 units. At the end of 3 months, you have invested Rs. 3,000 and received 156.67 units at an average NAV of Rs 19.2.

Systematic Transfer Plan (STP):

STP is similar to SIP, where you transfer a pre-determined amount on a specified date from one Fund to another (rather than from Bank to a Fund as in SIP). However, both Funds have to be from the same Fund house.

One important use of the STP is for investors who have large idle cash but don’t want to invest all of it in Equity at one go. In this case, the money can be parked in a low-risk Debt Fund (and earn better returns than a savings account) and initiate the STP.

This will ensure a pre-determined amount is transferred from your Debt Fund to an Equity Fund at regular intervals.


This is the rate at which a Fund Manager replaces his/her Fund’s investments. E.g. a 100% Turnover Ratio means a Fund has replaced all of its holdings over a 12-month period. Avoid such Funds as it means high brokerage costs, leading to lower returns.


Just like an investor owns shares of a company upon buying a stock, an investor is allotted units of the MF scheme proportionate to the money invested.

Variable Annuity:

An investment contract sold by an insurance company. Capital is accumulated, often through Mutual Fund investments, with the option to convert to an income stream in retirement.

Withdrawal Plan:

A Fund service allowing shareholders to receive income or principal payments from their Fund Account at regular intervals.


XIRR is the short form of the Extended Internal Rate of Return and is used to find the Return from investments done at different time periods.


Yield is a measure of the income return of a Mutual Fund. It is calculated by dividing the Annual Dividend Income Distribution Payment (by a Fund) by the value of the Mutual Fund’s shares.

Zero-Coupon Bond:

Bond sold at a fraction of its Face Value. It appreciates gradually, but no periodic interest payments are made. Earnings accumulate until maturity when the bond is redeemable at full Face Value. Nonetheless, interest is taxable as it accrues. As a result, zero-coupon bonds are often used for IRAs, Keoghs and other tax-deferred retirement plans.

Along with some of these terms, you might have come across a disclaimer ‘Mutual Fund investments are subject to market risk. Please read the offer document carefully before investing.

Read the article to know:‘What does ‘Mutual Fund is subjected to market risk’ really mean?’

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